Why Las Vegas Sands Is Underperforming in 2014

It may be hard to imagine, but Las Vegas Sands (NYSE: LVS) has underperformed the broader market by a wide margin in 2014. This is despite growing revenue 21.4% in the first quarter to $4.01 billion and earnings per share jumping 36.6% to $0.97.

But expectations were extremely high coming into 2014, and the stock has floundered as Macau's growth has slowed. However, long-term the company is positioned well, as long as its markets continue to grow.

Las Vegas Sands is positioned well for growth The best thing Las Vegas Sands has going for it is Macau. Chief Executive Officer Sheldon Adelson bet big on the Cotai Strip becoming the new Las Vegas Strip, and he was right. He now has central locations in the region.

What has driven results recently is mass market and premium mass market players trending toward Cotai from the Macau Peninsula, which is where Wynn Resorts (NASDAQ: WYNN) and MGM Resorts (NYSE: MGM) are now located. As seen in the map below, the trend is for gaming dollars to be moving from the northern peninsula to Cotai, which is where the mass market entertainment and gaming center is being built.

Las Vegas Sands already has The Venetian Macau, Four Seasons Macau, and Sands Cotai Central to profit from the trend toward Cotai, but it is also building The Parisian Macau next to Four Seasons as well as another tower at Sands Cotai Central. When completed, these resorts will give the company a dominant position in Cotai.

Dominance doesn't mean that competition won't increase, which will have a dampening effect on growth. Over the next three years, all six concessionaires in Macau will either build a new resort on Cotai or expand an existing one. Wynn is planning to open its resort in early 2016, and when it does, it will likely double revenue and profitability. MGM Resorts' new resort will also likely more than double profits coming from Macau. On that front, Wynn and MGM are able to grow faster because of their smaller base, while Las Vegas Sands already has its Cotai foundation in place.

With only one resort on the horizon, the days of outgrowing Macau as a whole, year after year, are probably over beginning in 2016. That doesn't mean the company won't grow, just that expectations need to come back in line with reality.

Shares are still expensive The challenge for investors looking at shares and growth prospects is that Las Vegas Sands' shares are still very expensive. The company's enterprise value (the sum of equity and net debt) is 13.75 times EBITDA over the past 12 months. That compares to a 13.1 ratio for Wynn and 10.3 for MGM Resorts, which have more relative growth prospects (from a smaller base to start).

When you go outside gaming, that kind of EV/EBITDA ratio looks incredibly high, with well-known companies like Apple and Wal-Mart trading for 9.4 and 8.3 times, respectively. These aren't apples-to-apples comparisons, of course, but it gives you an idea of the premium investors are paying for gaming stocks right now.

Foolish bottom line Las Vegas Sands is one of the best positioned companies in gaming, but a high valuation and increasing competition in its best market have me cautious on the stock right now. The driver of performance right now is going to be growth in Macau as a whole, and on that front there's some reason for concern. After growth of 18.6% last year, growth was down to single digits in May and was negative last month. I wouldn't be shocked if growth slows to single digits, and with all the new resorts coming on-line, that revenue will have to be spread among new resorts.

Shareholders who can hold on long-term shouldn't jump ship, but performance in the future isn't likely to come near what we've seen in the last five years. Personally, I'd like to be a buyer at a better value, and even with all the positive factors to consider, the stock is just too expensive for me right now.

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LVS's "normalized" earnings for Q1 were 87 cents, which was flat with the 87 cent normalized results for Q4. That fact helps to explain "some" of the correction in the stock price this year (the other factors being the ones cited by Travis here).

Secondly, MGM is so Vegas-intensive that it DESERVES the lower, 10.3 enterprise value. Even once MGM opens on Cotai, it's Vegas presence will serve as FAR more of a boat anchor than Wynn would experience.

Thirdly, leave it to Travis to contrast enterprise value of these companies with the likes of apple and Walmart.

There's also a lot more to understanding LVS's valuation than what Travis mentioned here. The dividend matters, of course, and the company's ability to cover such a dividend many times over without seriously denting cash. Speaking of cash, there's cash flow, which is humongous at LVS, and the steadily rising S&P credit rating of the company, which makes LVS increasingly the darling of money managers whose management covenants might have precluded consideration of an investment in LVS in the past.

And, of course, there's LVS's concept of "critical mass". Just the fact that Venetian Macau appears to be benefitting more from the advent of Cotai Central than Cotai Central ITSELF is testimony to how Sands China will leverage on-strip Parisian in ways that off-strip, Wynn Cotai could NEVER augment Wynn's resort clear over on the peninsula.

Hope this helps. Travis is getting better, but clarifications and augmentations still have a valuable place in these pieces.